Margonelli’s Oil on the Brain: A good start

Ken Boyd

For Petroleum News

Oil on the Brain by Lisa Margonelli strives to demystify the “life” of oil as it moves along its journey from deep underground to our local gasoline station. The author follows the customary divisions of the industry, which, using its own peculiar terminology, are: upstream and downstream. Upstream is exploration and production, the complex processes of finding the oil and getting it out of the ground. Downstream is everything else: pipelines, shipping, refining, marketing and sales. Most consumers only see the final part of the process, far downstream, at their local gas station.

About half of Oil on the Brain addresses these aspects of the oil industry. The subtitle is something of a misnomer since pipelines are not really discussed, and the book ventures farther upstream into the realm of exploration and downstream to the gas pump. No matter, the value lies in giving the reader a peek at what happens prior to the pump at the gas station.

The second half of the book follows Margonelli on her 100,000 mile odyssey through five oil-producing countries — Venezuela, Chad, Iran, Nigeria and China. A chapter each is devoted to the Strategic Petroleum Reserve and the New York Mercantile Exchange.

Left Brain, Right Brain

Like this book, the brain itself is often depicted as consisting of two major parts: Left Brain and Right Brain. The Left Brain is logical and analytical as befits the first part of the book. The Right Brain function is more subjective and will serve us well in deciphering the worldview of the oil business. The chapters on Strategic Petroleum Reserve and Nymex don’t really fit either category and will be deemed No Brain.

The author’s (Left Brain) journey begins at the local gas station and moves upstream through distribution, refining and exploration. The corner gas station, while familiar to all, is anything but well understood. Margonelli quickly discovers that the profit margins on gasoline are lower than ever (7 percent in 2004) and that most stations make more money selling bottled water, candy and trinkets than they do on the gasoline itself. Penny-pinching suppliers help make competition between stations fierce and unrelenting.

Those looking for industry collusion will have to look elsewhere. She discovers that gasoline price variations (in the face of countless investigations, white papers and political hot air) largely result from the consumers’ desire to keep driving at any cost. Yes, it’s supply and demand.

Distribution is the hectic and dangerous job of moving gasoline by tanker truck from bulk storage to individual users. These companies live and die by small fluctuations in price and on-time delivery is crucial. The refinery, as the author explains “… (is) the midpoint between the consumer and the oil fields, the place where gasoline and gas prices come from.” Here the raw oil is “cracked” into gasoline, heating fuel and other products. Despite their importance to our energy economy, refineries remain unloved by their neighbors. The author tours a refinery on a “Not Really Good Day” and finds that taming these complex beasts requires a melding of training and fortitude.

The drilling rig

The last stop upstream is the drilling rig. Unable to get on an oil rig, the author settles for a gas drilling rig in rural Texas. Despite the vivid, sometimes humorous, description of her experience, I find this chapter to be somewhat misleading. A small gas drilling operation bears little resemblance to major oil drilling projects. In no way is this meant to denigrate small independent drillers. They form the backbone of exploration in many smaller Lower 48 fields and make a substantial contribution to our nation’s energy reserves.

But this chapter leaves the impression that exploration drilling is a slapdash, seat-of-the pants operation. Nothing could be further from the truth. The colorful characters and ribald language are found on almost any rig, but virtually all major oil drilling operations are conducted with an almost military precision and discipline.

The tools of exploration are also given short shrift. Modern exploration and production technology allows oil to be found with a confidence level unknown even ten years ago.

Despite these shortcomings, the determination, enthusiasm and eternal optimism of the explorer are clearly and accurately portrayed.

No Brain

The two No Brain chapters address SPR and Nymex. SPR is a huge oil storage area in salt caverns along the Gulf Coast of the United States. The author’s attempts at finding the real purpose (or even the location) of the SPR, and what its effect on the oil markets may be, end in frustration. There seems to be no definitive answer.

She hopes to get a better sense of the world oil market at the place where oil is traded, in the oil trading pits at Nymex. Here she sees that “paper” barrels and real barrels are all mixed in a circus-like atmosphere of price bidding based on fact, fiction and gut-feel guesswork. Not many answers here. If you think the “No Brain” label is pejorative I direct the reader to the last sentences of chapters 5 (SPR) and 6 (Nymex). Decide for yourself.

Oil-producing country travels

The (Right Brain) last half of the book deals with the author’s travels to five oil-producing countries. Four of the five examined — Venezuela, Chad, Iran and Nigeria — share a similar, often depressing, history of past evils: war, mismanagement, poverty, government corruption and greed. The fifth, China, despite a similar history, is looked at through a more optimistic prism, as a potential bellwether for adopting new types of energy.

Even so, as the author discovers, this optimism must be tempered by the reality of what technology may actually be able to provide. And when.

Three factions are at play in each country: the government, the populace and the oil companies. Each distrusts the others, often for good reason. In these chapters the companies fade into the background and the governments and the citizens take center stage. The companies, mostly the world’s largest, are hunkered down in their corporate “compounds” — oases of the home-country culture embedded in an alien, sometimes hostile, local environment. The governments are busy making oil deals, deals that often benefit only a small part of the population. The people, with very little input to any of this, are left to hope that someday something good will come their way. For the most part these hopes have gone unrealized. The one benefit, which comes with its own set of problems, is cheap gasoline for the local citizenry.

Venezuela, Iran and Nigeria have produced a lot of oil for a long time. Each, in its own way, is perfectly capable of influencing the world oil markets. Venezuela sits on a vast oil resource and is a major supplier for the United States. Its new leader is building a powerful political base and threatens to cut off oil supplies to those who doubt his authority.

Nigeria, rife with corruption, seems to have an unending number of strikes, walkouts, kidnappings and pipeline explosions that cause market distortions. Iran occupies a strategic position in the Middle East and is well aware of the importance of the Straits of Hormuz to the world’s oil supply.

By contrast, Chad is a relative newcomer whose modest oil reserves have only recently been discovered. Today, Chad has the unenviable distinction of being both the poorest and most corrupt country on Earth. One hopes that Chad will find a sensible and sustainable use for its newly acquired wealth, but history does not favor this outcome.

China’s rapidly growing economy is characterized by its newly acquired passion for the automobile. As a result of this passion oil consumption has risen 45 percent in five years, along with choking pollution and massive traffic jams. But China is taking a leading role in developing new automobiles. They recognize the importance of “leapfrogging” conventional technology and are focusing attention on hybrids, electricity and hydrogen in their designs.

We come to realize that putting gasoline in our cars is the end point of a very long, very complicated process. In many ways this book is a tribute to the myriad people who, despite many obstacles, make this convoluted system work and keep it working. The author’s mood is neither angry nor ingratiating; if anything it is a bit sad. Sad, I think, because of what could be, but simply is not. Sad because this oil bounty is so poorly utilized and benefits so few.

This book is a diary, not a diatribe. The author makes observations and draws conclusions based on what she sees and hears. She spends little time finger pointing or name-calling although there is plenty of blame to be found. No book, however long, can cover all aspects of the complicated world of oil. Oil on the Brain is a good place to start.